Consider the airline oligopolistic industry with two firms (carriers), A and B.

Question

Consider the airline oligopolistic industry with two firms (carriers), A and B. Let the inverse demand function given by the equation p = 10-Q, where Q = qAT qB. Firms face the same total cost equal to TG = 4q, where i = {AB) 1) Compute the market equilibrium, assuming that the two firms simultaneously hoose their output levels. As decision variables, are quantities strategic substitutes or omplements and why iii) Return to case 1) (in the absence of merger the two firms play simultaneously) and assume that the two firms contemplate a merger that will reduce the marginal cost of the merged entity to 1, due to synergies. Should a Competition Commission allow this merger to occur? Explain your answer

Explanation / Answer

II)

P = 10 - Q

TC = 4Q

on differentiating TC

MC = 4

P = MC

10 -Q = 4

Q = 6

P =4

Ouput of two firms in Cournot Equilibrium = (2/3)*6

=12/3

= 4

Each firm produce 2 units

Demand is inversely related to price. Hence, Quantities are strategic substitutes.

III)

Merger of two firms would make it monopolist competition.

condition for equilibrium:

MR =MC

P = 10 -Q

TR = 10Q - Q^2

MR = 10 - 2Q

10 - 2Q = 1

9 = 2Q

Q = 9/2

Q = 4.5

Total output has increased by 0.5 units. Hence competition commission should allow this merger to occur.

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